I’m more confident that we are in a short-term risk-on setup this week than I am about having cranberry with my Turkey this Thursday.
Traditionally, November has been a strong month for the S&P 500, with an average increase of 0.88% in returns. This positions it as the third most profitable month for the year on average. We are clearly well past that. And yes — despite my concerns of a credit event happening toward the end of the year, I must admit that, so far, the stock market is indeed looking like how it tends to look entering Thanksgiving. During Thanksgiving week, the S&P 500 generates positive returns 68% of the time historically. These returns are higher than the average week. In other words, it does seem like seasonality is working despite my initial skepticism it would (so far).
The big plus that’s happening here is small-cap momentum seems to be taking place alongside ongoing momentum in Treasurys. This matters because if indeed “higher for longer” doesn’t play out, and yields drop further from here, it gives more breathing room for many zombie companies to perhaps survive on higher interest rates (or at least this is the narrative that will push prices in those stocks up). That momentum seems to be happening now.
Consumer Spending in Focus
The key issue at hand relates to the stability of consumer spending. Sales during the Thanksgiving and Black Friday period act as a barometer for market sentiment. If retail figures during this time are strong, it may signify the start of a vigorous shopping season that could potentially elevate stock prices. On this, I remain skeptical independent of short-term momentum underway here. Retail stocks broadly are still suffering, and it does seem like higher rates are hurting consumers. If sales end up surprising to the upside, then sure — that might be enough to push us into a December rally. I’m not convinced that’s the likely set up though.
When I see the charts on stocks like Walmart (NYSE:WMT), I get concerned that something bigger in the bull narrative is being missed about the health of the consumer. That’s what makes this to me more of a tradeable rally than a longer-term allocation, assuming conditions remain the same. While consumer spending is expected to reach $130 billion this Thanksgiving weekend, up 4% year-over-year, according to the latest International Council of Shopping Centers’ (ICSC) survey, I find it hard to believe that consumers can keep running on empty for much longer.
The Bottom Line
Bottom line here? As I noted on X and in The Lead-Lag Report, we remain in a short-term risk-on setup, and small-caps look to be the way to play it for now. But caution remains warranted. Too many people are taking high probabilities for granted to think they are guaranteed. There’s always a chance the year ends with fireworks, like it did on Christmas Eve in 2018 when the Dow Jones Industrial Average fell 1,000 points.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
